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Bye-Bye, Unlimited FDIC Coverage

Congress isn't likely to extend the FDIC’s Transaction Account Guarantee program, which is scheduled to end Dec. 31.

Corporate treasurers may need to find new places to park their money come Jan. 1, since it seems less and less likely that Congress will extend the life of unlimited Federal Deposit Insurance Corp. insurance on interest-free checking accounts.

In 2008, in the depths of the financial crisis, the FDIC created the Transaction Account Guarantee (TAG) program to provide such unlimited deposit insurance, largely to protect against bank runs. In 2010, Congress extended the program through the end of this year. Without congressional action, FDIC insurance on these accounts will revert back to the original cap of $250,000 per account as of Jan. 1.

According to the Independent Community Bankers of America (ICBA), companies and municipalities hold about $1.4 trillion of corporate and municipal deposits in these accounts. With unlimited FDIC insurance, treasurers have felt comfortable leaving their funds in a single account at one bank. Now, however, they will likely have to scramble to move the money into multiple bank accounts under $250,000 each or out of the banking system entirely and into money market funds.

Congress has limited time to act before the end of the year, and there’s no sign that extending the program is Mission Critical for legislators. When Congress returns from recess after the Nov. 6 elections, legislators will have more important things to deal with, such as the so-called “fiscal cliff” of tax increases and budget cuts.

James Ballentine, chief lobbyist at the American Bankers Association, equates Congress’s post-election priority list to a restaurant menu and calls extending TAG the “fourth or fifth course.”

That doesn’t mean the ABA has given up on the issue, which ranks as one of the banking industry’s top priorities. “We will be working with Congress when they come back,” says Ballentine, pictured above. But he adds, “The longer we wait, the harder it becomes to get it done—not impossible, but less likely.”

Brian Kalish, director of the finance practice at the Association for Financial Professionals, sees little support in Congress for a measure he believes has outlived its reason for being.

“The original purpose was so banks didn’t have to worry about bank runs. Do we still need that safety net? Should the federal government be in the insurance business to this extent?” Kalish asks. “It’s a sign of weakness that the banks want this.”

“It’s tough to see where the support is coming from,” he adds. “I’m not hearing of anyone in the House or the Senate who would support this.”

But Paul Merski, ICBA’s chief economist, sees “a good likelihood” that an extension will pass.

“We’ve gotten a very positive response to a temporary [two-year] extension,” Merski says. “With all of our advocacy on Capitol Hill in the House and Senate, there’s no concern it doesn’t have support.” He adds that the measure is also supported by the White House, which included an extension in its continuing budget resolution proposal.

However, Merski says, getting the extension passed is far from a slam dunk. “The real concern is getting a moving piece of legislation and getting it to the President’s desk.” He notes that Congress “will have a whole laundry list of things to act on when they come back” after the elections.

“It’s not a policy issue, but a process issue,” Merski says.

Consultancy Treasury Strategies is among the skeptics, with a blog post on its Website on Sept. 27 saying, “It’sunlikely that Congress will take up this issue during lame-duck sessions.”

Paul LaRock, a principal at Treasury Strategies, notes that the FDIC hasn’t said whether it will ask for an extension, a departure from 2010.

Assuming there is no extension, treasurers will need to start moving money into different accounts to stay under the presumed $250,000 limit on coverage.

LaRock, pictured at left, says treasurers will have to revert to the “more normal,” pre-2008 ways of dealing with counterparty risk, which means diversification. “Going back to the 1990s and 2000s, corporations did not leave hundreds of millions of dollars in bank accounts,” he says. “That’s going to change now.”

LaRock adds that having less on deposit will force treasurers to be more accurate about their cash needs.

“A large cash balance is a luxury because it creates a shock absorber against mistakes in liquidity,” he explains. “If you have hundreds of millions of dollars on deposit and you have a cash imbalance of a couple of million dollars,” it’s not an issue, but it would be if the company only has $250,000 in the account.

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